Got a big purchase to make? Prefer to pay for things upfront and avoid credit? Maybe hire-purchase is a better way to use your available cash. It’s a popular way to go but is it right for your particular situation? Here’s how a “getting to know you” guide to what hire purchase finance is, how it works, and why people like it.

What is hire-purchase finance?

Basically, hire-purchase finance is a method of acquiring assets or products without the need to invest the full amount of money in buying them.

Typically speaking, a hire-purchase agreement allows the hire-purchaser sole use of the asset in question, after which they have the right to buy the asset, often for a small or nominal amount. The buyer generally pays for the item in instalments but does not become the owner until the very last instalment has been paid off. These instalments can be structured in different ways: from equal and seasonal rentals to balloon or bulk payment rentals.

Why use hire-purchase?

The benefit of hire-purchase finance is basically that companies or individuals gain immediate use of the asset or product without having to pay for it upfront (as it can often be initially out of financial reach) or without having to borrow a large amount to make the out-right purchase.

Many Australians hire-purchase more costly items, such as new vehicles, to reduce the amount of capital they have tied up in the purchase. It is one way to go – but do the comparison: an actual car loan may suit you better.

Where do I find out more?

Retailers sometimes offer hire-purchase for expensive household items such as computing equipment and so forth. In addition, some car or agri-business manufacturers will also offer hire-purchase on their products but, if not, many of Australia’s banks and high street lenders can also assist you. Ask at your local bank.

Hire-purchase disadvantages

• You don't own the goods until you've paid back all the money. This means that you can’t modify or sell them without the permission of the legal owner.
• Your contract is often with a finance company and not the retailer themselves, who will own the goods until the final payment is made.
• The finance company might be permitted to take the goods back if you don't keep up to date with your repayments.
• You are liable for any damage caused.

Hire-purchase finance and GST

If the supply of the goods to you under a hire-purchase agreement is taxable, the price you pay includes GST. However, if the goods are for use in your business, you could possibly claim a GST credit for any GST included in the purchase price.